Westfall Township nears removal from financially distressed status

Wednesday

Jun 11, 2014 at 7:00 PM

BETH BRELJE

The state Department of Community and Economic Development and Westfall Township officials held a hearing this week to consider whether the township could be removed from Act 47, the financially distressed municipality status.

Westfall requested rescinding the status, DCED did a study to determine if that would be appropriate, and the hearing was the next step.

Everyone is in agreement that the financially distressed status should be rescinded, said DCED Local Government Policy Specialist Jonathan Hendrickson.

That is the recommendation to be made to DCED Secretary C. Alan Walker, who will review the study, hear testimony and make a final recommendation.

Being released from Act 47 status means the township will no longer receive oversight from the state. Westfall has been following a financial recovery plan and the plan is nearly complete.

“We have been less and less involved with them,” Hendrickson said, which is to be expected as a municipality recovers financially.

During the hearing, Hendrickson presented a detailed timeline of how Westfall became financially distressed through the settlement of several lawsuits. He also made some recommendations for the township going forward.

Here's a look at the timeline:

April 6, 2009: After nearly 20 years of legal, financial, zoning and civil rights disputes with real-estate developers David H. and Barbara D. Katz, Westfall Township agrees to a judgment against it of $20.8 million.

April 10, 2009: Westfall Township files a Voluntary Chapter 9 Bankruptcy. Act 47 of 1987 requires a municipality that files a municipal debt adjustment action under federal law to be deemed financially distressed.

April 14, 2009: Upon receipt and review of the township's Chapter 9 Bankruptcy Petition, the secretary of DCED orders the township be determined a distressed municipality under Act 47.

May 11, 2009: The secretary appoints Eckert Seamans Cherin and Mellott as the recovery plan coordinator for the township. Act 47 requires the coordinator to formulate its Act 47 recovery plan in cooperation with the bankruptcy court.

May 27, 2009: The Katzes file an objection to Westfall's bankruptcy petition.

Aug. 25, 2009 After settlement discussions, the Katzes and Westfall reach an agreement. Wesfall is required to pay the Westfall Township Municipal Authority the funds necessary to construct and install an 18,000 gallon-per-day sewage pumping station. The township paid $146,000 to the authority in October 2009 to satisfy this payment obligation.

Additionally, the nearly $21 million owed to the Katzes was set aside by the settlement and replaced with the amount of $6 million, without interest, payable in 80 quarterly installments of $75,000 each. Failure of the township to comply with these terms, including a late payment, would result in the monetary amount owed to the Katzes reverting to in excess of $21 million.

Oct. 19, 2009: The coordinator holds a public meeting in the township to receive public comment on a recovery plan on the settlement agreement and bankruptcy plan. Based upon further discussions with the township supervisors and staff, the coordinator files a revised plan with the township Oct. 29, 2009.

In order to rescind a municipality's financially distressed status, Act 47 requires that the conditions that led to the determination of municipal financial distress are no longer present.

According to Westfall's recovery plan, “the only issue driving the township into municipal distress, bankruptcy and Act 47 is its obligations to the Katzes resulting from the litigation and settlement” because “the township has historically balanced its operating budget and met its obligations to vendors and creditors on an annual basis.”

Therefore, the only issue the township must resolve in order for the secretary of DCED to rescind Westfall's status is its bankruptcy filing. Resolving this condition involved confirmation and implementation of the Chapter 9 Plan and, ultimately, discharge from bankruptcy.

Oct. 29, 2009: Westfall proposed a Chapter 9 plan to the court and began implementing that plan immediately.

March 2, 2010: The bankruptcy court issued an order confirming the township's Chapter 9 plan, which mirrored implementation of the Act 47 recovery plan.

Westfall's recovery plan contains nine initiatives including petitioning the court to raise the township's millage rate to meet its settlement obligations; pursuing loans to fulfill settlement obligations and meet operations expenses; instituting financial reporting procedures so that the board of supervisors and the Act 47 coordinator were fully aware of Westfall's finances; and developing a comprehensive plan with Matamoros.

June 4, 2010: Because the township implemented all nine initiatives, the bankruptcy court discharged Westfall from bankruptcy, meaning conditions which led to the determination of municipal financial distress are no longer present in the Township of Westfall.

Since Act 47 was passed in 1987, Westfall is the only municipality in Pennsylvania that has ever gone through the entire bankruptcy process, Hendrickson said.

Westfall's 2009 Recovery Plan was written with the expectation that the township would no longer require financially distressed status by the end of 2012. However, due to an additional judgment against Westfall, the township saw deficits and a declining fund balance.

2012: Westfall settles a lawsuit with former police Officer Robert Dombrosky for $703,000. The settlement required the township to make two payments of $175,000, one due in October 2012 and one due in May 2013, and the make annual payments of $35,000, plus interest, payable every May from 2014 to 2022. The township drew from its general fund balance to make the 2012 and 2013 payments on time. While the township had the available cash on hand, these payments depleted its cash reserves to below 10 percent of its annual revenue.

“These negative fund balances should not be taken lightly and should be the secretary's chief concern as he considers rescission,” Hendrickson said. “However, it is still important to note that Westfall does not have persistent structural distress. It does not have extraordinary expenditures which cannot be funded through basic taxation. It does not have a deteriorating tax base, an underfunded pension system, unwieldy contractual obligations, or a failing infrastructure.

“Instead, Westfall's distress fell into the category of “Managerial Distress.” In Westfall's case, poor administration occurred long before the current board of supervisors took office and long before the current treasurer and secretary were hired. Having overcome its past administrative difficulties, Westfall is in a much more stable position, despite two years with a negative fund balance.”

DCED also made some recommendations in Westfall Township's case, including:

- Continue to use a CPA as treasurer, who should continue to provide a monthly report with the status of the Katz and Dombrosky judgments.

- The township should work with county officials to pursue a more favorable assessment ratio or reassessment. Currently, the county assesses all property at 25 percent of market value. The township, along with nearly a quarter of all municipalities in Pike County, is at its maximum real-estate limit. A change in ratio or full reassessment may solve this difficulty.

- The township should continue to seek court approval for exceeding its real-estate millage limits for as long as necessary.

- The township should build its fund balance to at least 20 percent of its annual budget.

- The township should study and carefully consider acquiring new revenue sources, including the possibility of an earned income tax.

- State liquid fuels funding is projected to increase dramatically over the next three to five years. Liquid fuels revenue for 2013 was $82,104. For 2014, this increases to $94,000. The township should budget its necessary roads improvements out of these increased funds and utilize general fund revenue to build its fund balance.

- In an effort to decrease expenditures, the township should pursue intergovernmental or shared services arrangements with Matamoros or other neighboring municipalities. The township has seen cost savings through its Eastern Pike Regional Police Department and it would likely see savings through similar arrangements with the public works department.

- The township must ensure that it never misses a payment to the Katzes. Should the Township miss a single payment by more than 10 days, the judgment against it will revert back to in excess of $21 million. The township should maintain a fund balance for the Katz Settlement Fund at no less than $100,000.